Trouble is brewing among America’s corporate borrowers

Financiers seem unable to resist fauna metaphors when describing troubled company balance-sheets. When Tricolor Holdings and First Brands, two auto-industry firms, declared bankruptcy in October, Jamie Dimon, boss of JPMorgan Chase, likened the situation to a “cockroach”—where there is one bad loan, there are probably more. In February, after Blue Owl was forced to ban capital withdrawals from a private-credit fund amid an onslaught of redemption requests, Mohamed El-Erian, an investor, pondered whether the lender’s troubles were a dead coalmine canary or something worse—like termites, indicating deep structural problems.

Not long ago it seemed as though the corporate-debt blow-up many had feared when central banks began raising rates had been averted. Default rates rose, reaching 5% of the value of speculative-grade debt in America in 2024, but declined last year (see chart 1). Between the first six months of 2021 and the same period in 2025, the debt of America’s non-financial firms as a share of GDP fell from 164% to 141%, as they deleveraged in response to higher rates.

Now the nervousness is back. On March 13th America’s GDP growth for the fourth quarter of 2025 was revised down to 0.7%, below investors’ expectations. Then war in the Middle East sent energy costs soaring. The impact on prices may make the Federal Reserve’s rate-setters reluctant to ease the burden on borrowers. Previous energy shocks led to a wave of defaults. Meanwhile, investors are fretting that artificial intelligence will make all sorts of businesses obsolete. The anxiety has been heightened by the opacity of the private-credit market, which has expanded over the past few years and has become a big source of lending to the riskiest borrowers. Although the headline default rate on private-credit loans currently remains below 2%, the true figure is now much higher.

Consider a company unable to keep up with interest payments on a private loan. “No one wants to end up in bankruptcy court. It’s expensive, and it spooks employees, customers and suppliers,” says Tuck Hardie of Houlihan Lokey, a bank. Instead, the troubled company—often guided by a private-equity owner, since many private-credit borrowers have one—may first seek a “payment in kind”, in which it adds the interest it owes to its loan balance. For listed private-credit funds, such arrangements made up 5-6% of income five years ago, and now make up 8%(see chart 2). Another option is “liability management”. This can be thought of as yoga for failing firms—repayment timelines are stretched and obligations contorted in ways few thought possible.

Once such manoeuvres are included, the default rate in private credit rises to around 5%. These workarounds can give borrowers time to right their businesses. And if they can’t, bankruptcy may still be dodged. Public losses embarrass private-equity firms; a quiet handover to creditors is often preferred. A recent study by Goldman Sachs, another bank, supports this. Since 2023 around 100 private European companies—including Bonhams, a British auction house; Dainese, an Italian sportswear brand; and Tapì, an Italian bottle-cap maker—have been handed to lenders in debt-for-equity swaps, often called “taking the keys”.

The result is that trouble could be spreading well before it shows up in the usual indicators of corporate distress. By then, the termites may have settled in. ■